The EU announced its withdrawal from the Energy Charter Treaty on 27 June 2024. In tandem, the EU and 26 of its Member States declared their intention to sign an agreement stipulating the non-applicability of the Treaty’s investor-state arbitration provisions to intra-EU disputes, thereby giving effect to the Komstroy ruling of the European Court of Justice (“ECJ”). The EU’s withdrawal potentially removes an obstacle to the Treaty’s modernisation, giving new impetus to the reform efforts.
Summary
- The EU has announced its withdrawal from the Energy Charter Treaty.
- The withdrawal will take effect in one year’s time, but subject to a “sunset clause” that protects existing investments for a further 20 years.
- EU Member States have declared their intention to conclude an agreement stipulating the Treaty’s non-applicability to intra-EU proceedings, thereby implementing the ECJ’s Komstroy ruling.
- The EU’s withdrawal may lead to resumed efforts to reform the Treaty.
EU announces its withdrawal from the Energy Charter Treaty
The Belgian Energy Minister Tinne Van der Straeten, representing the President of the European Council, gave notice of the EU’s withdrawal from the Energy Charter Treaty on 27 June 2024 (see Press Release of the European Council of 27 June 2024). The withdrawal will take effect one year after the depositary of the Energy Charter Treaty receives the notification.
As previously reported, the European Commission announced its intention to propose a joint and coordinated withdrawal from the Treaty to EU Member States on 7 July 2023 (see our article of 1 August 2023 – German only). Until then, the EU had been considered a supporter of efforts to modernise the Treaty, and the Commission had campaigned for EU Member States to adopt and approve its proposals for amendments (see our article of 20 April 2023 – German only), which included giving contracting states the option to exclude investment protection after ten years even for existing fossil fuel investments. However, after the revised version of the Treaty failed to receive the requisite approval from EU Member States (see Commission Decision of 7 July 2023, C(2023) 4720 final, last accessed on 30 June 2024), the Commission concluded that maintaining the status quo was not an option since the Treaty provisions were not in line with EU investment protection policies.
The Commission subsequently presented two draft Council decisions on 1 March 2024, proposing that the EU and Euratom withdraw from the Treaty but that EU Member States have the option to remain a contracting state if, contingent upon reforms, they preferred not to withdraw. These drafts were formally adopted at the European Council meeting on 30 May 2024.
Continued protection for investments based on the Energy Charter Treaty’s sunset clause
The EU’s withdrawal from the Energy Charter Treaty will take effect one year after receipt of the notification by the depositary, Portugal. Once the withdrawal takes effect, investors will not be able to require the EU to comply with the Energy Charter Treaty for new investments.
Several EU Member States had already declared their withdrawal from the Energy Charter Treaty, with France’s withdrawal taking effect on 8 December 2023, Germany’s on 20 December 2023, Poland’s on 29 December 2023 and Luxembourg’s only recently on 17 June 2024. Further withdrawals will take effect later this year or in 2025 – with Slovenia’s withdrawal becoming effective on 14 October 2024, and those of Portugal, Spain and the United Kingdom on 2 February 2025, 17 April 2025 and 27 April 2025 respectively.
According to the sunset clause in Article 47(3) of the Energy Charter Treaty, investments already existing at the time the respective withdrawals take effect remain protected by the Treaty for a further 20 years (see our article of 20 April 2023 and our article of 1 August 2023 – German only).
In its proposed resolution for the European Council of 7 July 2023, however, the European Commission stated that it did not consider Article 47(3) of the Energy Charter Treaty or the Energy Charter Treaty as such to be applicable to intra-EU disputes (European Commission proposal of 7 July 2023, COM(2023) 447 final, last accessed on 30 June 2024). The Commission hoped to minimise the risk that arbitral tribunals might hold a different view on the non-applicability of the Energy Charter Treaty to intra-EU disputes by way of an agreement between the European contracting states relevant for the interpretation of the Energy Charter Treaty. This agreement was intended to clarify that the offer to conclude an arbitration agreement contained in Article 26 does not apply to intra-EU proceedings (European Commission proposal of 7 July 2023, COM(2023) 447 final, last accessed on 30 June 2024). However, it is questionable whether an agreement involving only some of the contracting states is sufficient for this, as Article 31(3)(a) of the Vienna Convention on the Law of Treaties refers to “the parties” (see our article of 1 August 2023– German only).
EU and Member States agree on implementation of Komstroy ruling
On 26 June 2024, at the same time as the EU’s withdrawal from the Energy Charter Treaty, the EU and 26 Member States therefore signed an inter se declaration, which is to precede an inter se agreement. The 26 Member States also initialled the inter se agreement, the text of which is identical to the inter se declaration. The declaration and agreement are intended to implement the ECJ’s ruling of 2 September 2021 in the Komstroy case (C-741/19) and to stipulate that Article 26 of the Energy Charter Treaty does not apply to intra-EU proceedings. Courts of the EU Member States have already begun setting aside arbitral awards issued in intra-EU proceedings with place of arbitration in the EU, making reference to the Komstroy ruling, among others. For example, the Swedish Svea Court of Appeal recently (on 28 June 2024) set aside an arbitral award issued in 2018 against Spain in favour of investors from Luxembourg and Denmark under the Energy Charter Treaty concerning investments in renewable energies (decision of 28 June 2024 – T 1626-19, Foresight Luxembourg Solar 1 S.à.r.l., et al. v Kingdom of Spain). The decision is not the first of its kind, however, since the Svea Court of Appeal has, as far as can be seen, already set aside at least four arbitral awards issued under the Energy Charter Treaty, making reference to the Komstroy ruling, among others.
According to Belgian Energy Minister Tinne Van der Straeten, both the declaration and the agreement are important for protecting the EU and its Member States when it comes to intra-EU disputes and enforcement measures – before courts in third countries – relating to intra-EU proceedings. This should ensure the effective implementation of the Komstroy ruling (see Press Release of the European Council of 27 June 2024). The EU Member States see this as a means to finally eliminate what has thus far been an effective instrument for the legal protection of investors in intra-EU investment disputes. From investors’ point of view, however, it is disappointing that the resulting gaps in legal protection are not at the same time closed in other ways. At any rate, given the lack of rule of law minimum standards in some cases, a referral to only Member States’ courts is not sufficient (see also 2023 Rule of law report of the European Commission).
It is doubtful whether the other contracting states to the Energy Charter Treaty and arbitral tribunals will regard a purely intra-European agreement as capable of also interpreting or modifying the Energy Charter Treaty for the other contracting states (see above as well as our article of 1 August 2023). The Federal Supreme Court of Switzerland recently stated in clear terms that it was not bound by the Komstroy ruling and could not see any conflict between EU law and Article 26 of the Energy Charter Treaty, but international law did not in any case grant primacy to EU law (decision of 3 April 2024, paragraph 7.8.2. - 4A_244/2023).
Efforts to reform the Energy Charter Treaty appear to be gaining momentum
While withdrawing from the Energy Charter Treaty, the EU has given the Member States that have not yet declared their withdrawal from the Treaty and wish to remain a party to it the chance to support its modernisation in the vote at the next Energy Charter Conference. According to the European Council, this is a component of the “Belgian roadmap”, which is part of a political compromise and aims to overcome the standstill in the efforts to reform the Energy Charter Treaty due to a lack of EU approval (see Press Release of the European Council of 27 June 2024). This means that the EU Member States that wish to remain a party to the Energy Charter Treaty will be able to approve or abstain from voting on the reform plans. This is to be welcomed, as the Belgian roadmap will accordingly make it possible for the Energy Charter Treaty to be modernised, at least for investments in the EU by investors outside the EU, and for protection for existing fossil fuel investments to potentially be excluded after ten years (i.e. earlier than after a withdrawal to which the sunset clause applies).
The reform efforts are expected to gather steam at the next Energy Charter Conference. The Secretary General of the Energy Charter already called on the EU Member States in July 2023 to continue working towards the modernisation of the Energy Charter Treaty (see Statement by the Secretary General on 11 July 2023). The stage now seems to be set for this.
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